Month: December 2013

Federal tax breaks come and go, and this year is no exception. Unless Congress takes action, 55 of them are set to expire on December 31, 2013. Let’s take a look at the ones that are most likely to affect taxpayers like you.

1. Teachers’ Deduction for Certain Expenses
Primary and secondary school teachers buying school supplies out-of-pocket may be able to take an above-the-line deduction of up to $250 for unreimbursed expenses. An above the line deduction means that it can be taken before calculating adjusted gross income.

2. State and Local Sales Taxes 
Taxpayers that pay state and local sales tax can deduct the amounts paid on their federal tax returns (instead of state and local income taxes)–as long as they itemize. In other words, if you’re thinking of buying a big ticket item such as a boat or car and live in a state with sales tax, you might want to think about buying it this year.

3. Mortgage Insurance Premiums
Mortgage insurance premiums (PMI) are paid by homeowners with less than 20% equity in their homes. These premiums were deductible in tax years 2012 and 2013; however, this tax break is scheduled to end on December 31, 2013. Mortgage interest deductions for taxpayers who itemize are not affected.

4. Exclusion of Discharge of Principal Residence Indebtedness
Typically, forgiven debt is considered taxable income in the eyes of the IRS; however, this tax provision, which expires at the end of this year, allows homeowners whose homes have been foreclosed on or subjected to short sale to exclude up to $2 million of cancelled mortgage debt. Also included are taxpayers seeking debt modification on their home.

5. Distributions from IRAs for Charitable Contributions
Taxpayers who are age 70 ½ or older can donate up to $100,000 in distributions from their IRA to charity. Some people do not want to take the mandatory minimum distributions (which are counted as income) upon reaching this age and instead can contribute it to charity, using it as a strategy to lower income enough to take advantage of other tax provisions with phaseout limits.

6. Mass Transit Fringe Benefits
In 2013, commuters using mass transit can exclude from income up to $245 per month on transit benefits paid by their employers such as monthly rail or subway passes, making it on par with parking benefits (also up to $245 pre-tax). This provision is set to expire at the end of the year, however and in 2014, pre-tax benefits for mass transit commuters drop to a maximum of $130 per month, while parking benefits remain the same.

7. Energy Efficient Appliances
This tax break has been around for a while, but if you’re still thinking about making your home more energy efficient, now is the time to take advantage of this tax credit, which reduces your taxes (as opposed to a deduction that reduces your taxable income). The credit is 10% of the cost of building materials for items such as insulation, new water heaters, or a wood pellet stove.

Note: This tax is cumulative, so if you’ve taken the credit in any tax year since 2006, you will not be able to take the full $500 tax credit this year. If, for example, you took a credit of $300 in 2011, the maximum credit you could take this year is $200.

8. Electric Vehicles

Buy a four-wheel electric vehicle such as a Ford Focus Electric (Model years 2012-2014), BMW i3 Sedan (Model year 2014), Fiat 500e (Model year 2013), and Nissan Leaf (Model years 2011-2013) and take a tax credit of $7,500. Other vehicles, such as a 2014 Accord Plug-In Hybrid and the Toyota Prius Plug-in Electric Drive Vehicle (Model years 2012-2014) are eligible for a lesser tax credit. Call us for additional information on tax credits for electric vehicles.

Note: The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States.

9. Donation of Conservation Property
Also expiring this year is a tax provision that allows taxpayers to donate property or easements to a local land trust or other conservation organization and receive a tax break in return.

10. Small Business Stock
If you’ve been thinking about investing in a small business such as a start-up C-corporation, consider doing it this year because this tax provision expires on December 31. If you hold onto this stock for five years, you can exclude 100% of the capital gains–in other words, you won’t be paying any capital gains. If you wait until January, you will only be able to exclude 50% of the capital gains.

To learn more about whether you should be taking advantage of these and other tax credits and deduction set to expire at the end of 2013, please give us a call today.

• By Leon Clinton
• December 10, 2013

Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax changes in 2013.

Standard Mileage Rates 
The standard mileage rate in 2013 is 56.5 cents per business mile driven, 24 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Health Care Tax Credit for Small Businesses 
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Credit for Hiring Qualified Veterans
The maximum credit that employers can take for hiring qualified veterans in 2013 is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.

Section 179 Expensing 
In 2013 the maximum Section 179 expense deduction for equipment purchases is $500,000 of the first $2,000,000 of certain business property placed in service during the year. The bonus depreciation is 50% for qualified property that exceeds the threshold amount.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

• By Leon Clinton
• December 9, 2013

From personal deductions to tax credits and educational expenses, many of the tax changes affecting individuals were related to the signing of the American Taxpayer Relief Act (ATRA), which modified, made permanent, or extended a number of tax provisions that expired in 2010 and 2011. With that in mind, here’s what individuals and families need to know about tax changes that took effect in 2013.

Personal Exemptions 
The personal and dependent exemption for tax year 2013 is $3,900.

Standard Deductions
In 2013 the standard deduction for married couples filing a joint return is $12,200. For singles and married individuals filing separately, it’s $6,100, and for heads of household the deduction is $8,950.

The additional standard deduction for blind people and senior citizens increases in 2013 to $1,200 for married individuals and $1,500 for singles and heads of household.

Income Tax Rates 
Beginning in tax year 2013, a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.

Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $72,500 for a married couple filing a joint return.

Estate and Gift Taxes 
The recent overhaul of estate and gift taxes means that there is an exemption of $5.25 million per individual for estate, gift and generation-skipping taxes, with a top rate of 40%. The annual exclusion for gifts is $14,000.

Alternative Minimum Tax (AMT) 
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT. For 2013 exemption amounts are $51,900 for single and head of household filers, $80,800 for married people filing jointly and for qualifying widows or widowers, and $40,400 for married people filing separately.

Marriage Penalty Relief 
For 2013, the basic standard deduction for a married couple filing jointly is $12,200.

Pease and PEP (Personal Exemption Phaseout) 
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA and affect taxpayers with income at or below $250,000 (single filers) and $300,000 for married filing jointly starting with tax year 2013.

Flexible Spending Accounts (FSA) 
Flexible Spending Accounts are limited to $2,500 per year starting in 2013 (indexed to inflation) and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Long Term Capital Gains 
In 2013 tax rates on capital gains and dividends for taxpayers whose income is at or below $400,000 ($450,000 married filing jointly) remains at 2012 rates. For taxpayers in the lower tax brackets (10% and 15%), the rate remains at 0%, (the same as in 2012). For taxpayers in the middle tax brackets however, the rate increases to 15%. For taxpayers whose income is at or above $400,000 ($450,000 married filing jointly), the rate for both capital gains and dividends is capped at 20% (up from 15% in 2012).

Individuals – Tax Credits

Adoption Credit 
In 2013 a nonrefundable (i.e. only those with a lax liability will benefit) credit of up to $12,970 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit 
The child and dependent care tax credit was permanently extended for taxable years starting in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit 
For tax year 2013, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Earned Income Tax Credit (EITC)
For tax year 2013, the maximum earned income tax credit (EIC) for low and moderate income workers and working families rises to $6,044, up from $5,891 in 2012. The maximum income limit for the EITC rises to $51, 567 (up from $50,270 in 2012) for married filing jointly. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals – Education Expenses

Coverdell Education Savings Account 
You can contribute up to $2,000 a year to Coverdell savings accounts in 2013. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit
For 2013, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance 
In 2013, as an employee, you can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit 
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2013, the modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers and $52,000 for singles and heads of household.

Student Loan Interest 
In 2013 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $60,000 (single) or $125,000 (married filing jointly). The deduction is phased out at higher income levels. In addition, the deduction is claimed as an adjustment to income so you do not need to itemize your deductions.

Individuals – Retirement

Contribution Limits
For 2013, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $17,500. For persons age 50 or older in 2013, the limit is $23,000 ($5,500 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,000 for persons under age 50 and $14,500 for persons age 50 or older in 2013. The maximum compensation used to determine contributions increases to $255,000.

Saver’s Credit 
In 2013, the AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $59,000 for married couples filing jointly, $44,250 for heads of household, and $29,500 for married individuals filing separately and for singles.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

• By Leon Clinton
• December 5, 2013